Derivatives traders have cut the likelihood of a Fed rate increase to less than 50 percent for the rest of the year, and are assigning a zero percent probability that the Federal Open Market Committee will boost borrowing costs when it meets later this month.
“The Fed has already indicated its reluctance to hike and is very unlikely to hike to defend the currency,” said Steven Englander, New York-based global head of Group-of-10 currency strategy at Citigroup Inc., the world’s biggest currency trader. “If anything, they seem to be cheering any weakness the U.S. dollar encounters.”
The greenback’s slide may be the start of a 30 percent plunge over the next three years, according to Ulf Lindahl, chief executive officer of currency manager A.G. Bisset Associates. The 35-year market veteran, who manages more than $1 billion from Norwalk, Connecticut, said the dollar will decline as U.S. interest-rate expectations stay low.
Dollar View
The gloomy outlook for the dollar is short-sighted, according to Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co. He expects the Fed will continue to tighten monetary policy as the economy strengthens, while central bankers from Tokyo to Frankfurt are committed to currency-weakening stimulus.
Yet signals from the Fed that policy will remain accommodative for the foreseeable future is thinning the ranks of dollar bulls.
“We’re dollar bears and have been for a while,” because the divergence between tighter U.S. monetary policy versus easing by other central banks is mostly priced in, said Daragh Maher, New-York-based head of U.S. currency strategy at HSBC Holdings Plc.
The bank called an end to the dollar rally last March, forecasting the currency ending 2016 at $1.20 per euro, versus $1.1433 on Tuesday.